monetary stability in vietnam

Road Map• The past and the present p p  Growth, inflation, and macroeconomic policies  The banking system, credit growth, and macrofinancial linkages • The future: A framework for mone

Monetary Stability in Vietnam

Risk Vietnam 2012 Conference

Hanoi, May 9, 2012

Sanjay Kalra

IMF Resident Representative for Vietnam/Lao PDR

Road Map

• The past and the present p p

 Growth, inflation, and macroeconomic policies

 The banking system, credit growth, and macrofinancial linkages

• The future: A framework for monetary and exchange rate

stability

The Past and the Present

The past and the present

• Growth and inflation—The tradeoff

• Balance of payments and international reserves

• Macroeconomic policies and administrative controls

Growth and Inflation

30

Inflation (y/y percent change)

12

GDP Growth (y/y percent change, average 2007-2011)

Growth and Inflation: Tradeoff

Balance of payments and International reserves

Macroeconomic policies: SBV policy rates

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Macroeconomic policies: Fiscal deficits and public debt

Macroeconomic policies: The dong and the dollar

14,000

Exchange Rates (dong per U.S dollar) 14,000

Macroeconomic policies: Administrative Controls

• Credit growth targets

• Deposit interest rate cap

– Sectoral credit allocation and lending rates for “priority” sectors

– Limits on real estate lending

• Loan restructuring guidelines

The past and the present

• Banking system in Vietnam—overbanked, but underbanked g y ,

• Credit: Rapid growth … and the hangover

• Macrofinancial linkages

Banking system in Vietnam: Overbanked, but underbanked

Crowded financial and banking system …

Vietnam: Financial System Structure, 2011

35 JS Banks

18 financial Co.

13 financial leasing Co.

1 People's credit fund

48 foreign bank

branches

Source: SBV

20 40

0

1991 1993 1995 1997 1999 2001 2005 2006 2007 2008 2009 2010 2011

… dominated by 5 large SOCBs

Banks' market share by credit, 2010 Banks' market share by asset, 2010

SOCBs,

58 5%

Medium JSBs 12 5%

Small JSB, 4%

(In percent)

SOCBs, 48.2%

Medium

JSBs, 15.4 %

Small JSBs, 4.6%

Credit: Rapid growth …

75

Thailand Phillipines Indonesia Vietnam Malaysia 0

and the hangover

• Liquidity problems in weak banks

• Solvency: Low capital adequacy/banks have limited buffers; banks’ NPLs—low by VAS, but much higher by IAS/IFRS; exposure to Vinashin/financially weak SOEs unknown

• Unsustainable business models: Growth expectations; RE prices; Noncore/other businesses

10 25

(Reserves + Treasuries + SBV

• Unsustainable business models: Growth expectations; RE prices; Noncore/other businesses

8 20

(Reserves Treasuries S V securities)/Deposits SBV refinancing/Total credit (RHS)

4

6 15

2 10

NPLs—size/credibility

The Future: A Framework for Monetary

and Exchange Rate Stability

Monetary Stability: Objectives and Goals

• Internal balance

 Low, stable inflation

 Sustainable, high growth rate

• External balance External balance

 Sustainable current account deficits

 Stable capital flows

 Build international reserves

The Monetary Policy Framework: Theory

economy trilemma

Open Capital Account

constraint, but ensuring

macroeconomic policy

consistency is important, even

as central banks pursue multiple

objectives with multiple

instruments.

losing sight of some of the basic

The Monetary Policy Framework: Practice

USD, gold, and other assets Vietnam approximates a small open economy with free capital mobility If so constraints of the trilemma largely apply

cannot be pursued simultaneously Attempts to fix both interest rates and

exchange rates with capital mobility can result in capital inflows which

exchange rates with capital mobility can result in capital inflows which

overwhelm the system

instruments interest rates quantitative credit restrictions reserve

instruments—interest rates, quantitative credit restrictions, reserve

requirements, macro-prudential policy tools

principles/consistent macroeconomic policies

monetary policy in EMEs, e.g., Singapore, HKSAR, Indonesia, in dealing with

capital inflows and asset price inflation pressures

capital inflows and asset price inflation pressures

The Monetary Transmission Mechanism in Vietnam

• Monetary policy transmission complicated by

 Transition: rapid changes in the economy and financial system

 Partial dollarization and asset substitution—dong, dollar, and gold

• Analytical literature—Determinants of inflation

 Food and fuel prices

The Monetary Policy Framework in Vietnam: Recommendations

• Near term



 Exit from administrative controls

 Clearly specify simple monetary policy objective, anchors, and tools

 Supportive and coordinated fiscal policy pp p y

 Banking sector stability—address confidence and liquidity problems

The Monetary Policy Framework in Vietnam: Recommendations

• Medium and long term

 Stable and predictable monetary policy

 Confidence in the dong and exchange rate flexibility

 Market determined exchange rate

 Enhance indirect, market-based instruments of monetary control

 Improve the monetary transmission mechanism

 Further develop money, interbank and other markets

 Sustainable levels of public debt

 Structural reforms

 Banking sector

 State-owned enterprises

 Public investment

Banking System: Objectives and Goals

Immediate/Short-term

• Banking system stability  Solvency, liquidity and effective financial intermediationBanking system stability  Solvency, liquidity and effective financial intermediation

• Timely intervention  Prevent contagion or systemic concerns

• Confidence in banking system  Prevent deposit runs

Longer-term/Structural

• Address solvency problems

• New governance framework

 new private capital

 bank discipline in lending

 allocate first losses to shareholders

• Only viable/sustainable banks should remain  Improve operational efficiency

• Build competition and resilience

• Strengthen overall infrastructure of financial system

• Improve access to financial servicesImprove access to financial services

Deleveraging

Weak credit growth

Channels

• Supply

Higher funding costs

Higher interest margins

Lower capitalization

• Demand

Overextended borrowers have lower

credit demand

Peak NPLs

Lower capital adequacy

CESEE: CAR Under Complete Write-off of Existing NPLs (in percent of RWA)

Sources: Working Group on NPLs in Central, Eastern and Southeastern Europe, March 2012

Fiscal Cost of Bank Restructuring

Thank you